Increasing Returns and Animal Spirits

The purpose of this note is to simply point out that the multiplicity, intrinsic of course to the presence of non-convexities, characterizes the models of growth with external increasing returns which have been studied recently, and, more importantly, to show that the many competitive equilibria which often arise in those models can be interpreted as "animal spirits" equilibria- that is, equilibria indexed by the consumers' optimism or pessimism. This multiplicity of competitive equilibrium paths can be viewed as providing a new foundation upon which to build a theory of self-fulfilling prophecies, one which relies solely on the existence of external effects and does not rest on the overlapping generation structure or on back- ward-bending offer curves. The conclusion that multiple animal spirits competitive equilibria are likely to arise in a model of external increasing returns would survive the generalization of the framework used in this paper to many-period environments- be they overlapping generation or representative agent, infinite horizon structures.(This abstract was borrowed from another version of this item.)